Article excerpt

For 20 years banks and investment product firms -- mutual fund and insurance companies -- have had a mutually beneficial relationship. Banks, with their position of trust and access to tens of millions of households, and product firms, with their investment and distribution expertise, have made a formidable team. There's no doubt that such partnerships have helped millions of people.

The bank-vendor relationship is easy to understand. Banks have the customers and the brokers, vendors have the products. But over the past several years a disturbing and potentially disastrous trend has taken shape. Banks, realizing the power they wield by "owning" the customer relationships, have set restrictions on the number of providers they work with in order to simplify their product lists and make their product menu more manageable.

On one level this makes sense. It's hard to support an array of relationships providing hundreds of products each with their own administrative/operational issues. And a vendor is far more willing to invest in a bank's distribution system -- provide training and marketing support -- when it knows that its competition will be limited. You're much more apt to get a sales lift competing with three or four similar offerings than with 10 or 12.

The problem is the way banks select products and vendors. Most banks and third-party marketing firms that provide brokerage services to banks use RFP -- request for proposal -- to screen prospective vendor partners. Other banks, especially smaller ones, rely on formal or informal presentations.

In either case, the banks weigh a wide range of factors. They mainly want to know -- and must be comfortable with -- their would-be partners' financial strength, servicing resources, marketing support, etc.

They also want fees. All sorts of fees.

The fact is that banks are finding new and innovative ways for product manufacturers to funnel money to them for the privilege of being a partner or preferred provider. These run the gamut of flat up-front payments to funding for the banks' "training university" to paying for attendance and speaking slots at banks' sales meetings.

The most popular form of these payments, particularly at the largest banks, is a combination of large up-front entry fees plus basis points on sales. Others are asking for and getting extra fees; some product providers pay separate "marketing support fees" and others pay mutual fund management fees or reinsurance fees.

These fees can add up to seven and eight figures. In return, the product firms get access, attention, and limited competition; they look at these fees as the cost of doing business. After all, it makes sense to buy into a bank's system when it can mean upward of $1 billion a year in sales.

But the industry has to take a close look at these fees, what they buy, and the long-term implications for banks, the product firms, and most important, customers.

These fees aren't new, but over the past 10 years, as banks' sales of investment products has grown, so has their ability to get these fees. …